Goldman Gets Bullish on Big Banks

NEW YORK (TheStreet) -- Goldman Sachs is bullish about the big banks ahead of their third-quarter reports, saying current share prices don't fully reflect the earnings potential of the sector.

The firm lifted its view of the large-cap bank sector to attractive from neutral. It specifically raised ratings on Wells Fargo (WFC Quote) to "Buy" from "Neutral" and Comerica (CMA Quote) to "Neutral" from "Sell." Goldman also added Capital One (COF Quote) to its "Conviction Buy" list, where JPMorgan Chase (JPM Quote) and Bank of America (BAC Quote) are listed. The firm currently doesn't have a rating on Citigroup (C Quote).

The aforementioned stocks fared well in the wake of the call: Wells Fargo shares rose 5.7%; Comerica's stock added 3.2% to $29.70; Capital One shares tacked on nealry 6% to $35.1; JPMorgan shares gained 3.5% to $43.31; Bank of America's stock advanced 2.6% to $16.77; and Citigroup was up 3.1% to $4.66.

"The market has failed to recognize the dramatic improvement in earning power at the large banks versus the regionals," the note says. "[T]angible assets per share have increased 29% for large banks vs. a 25% decline for regionals. Pre-provision earnings per asset has increased 7% vs. -14% for regionals. We believe this difference in earnings power has not been fully reflected in share prices."

The firm continues to be cautious on most regional banks, save Comerica, given "permanent earnings dilution and later cycle credit issues," according to the note.

Big banks were able to take advantage of the improved capital markets activity and mortgage refinance boom this year, while regional banks "tend to be asset sensitive and thus their net interest margin falls when Fed Funds [rate] falls," the note says.